Anyone who has read a little bit about investing and personal finance has seen tables that explain the power of compound interest. You know, the kind where we see how $1 invested at Y% interest will grow after 10 years, 20 years, 30 years, and so on. Of course, the final row is always some shockingly large amount of money. The lesson is clear: start saving early and let your money grow.

These tables are intended to motivate people to save for retirement, so the row listings tend to stop after about 40 or 50 years. But after seeing the remarkable growth, many readers have probably done the calculation to extrapolate for a bit longer: what if the amount compounded for 60, or 70, or even a hundred years. Stretched long enough, the amount is dizzying. Of course, after a hundred years, the original saver will not be around to make use of that money. But the money could be left to heirs or charity instead. In a previous post, I wrote about how we might calculate a perpetual withdrawal rate that could then be used to draw from that accumulated sum indefinitely.

Has anyone ever done this? Of course, there are many famous family fortunes that have been passed down through generations and charitable foundations that have lasted for a long time. But those are different from what I mean, because they usually involve some sizable initial fortune that is built through active construction of a business empire. What about growing the initial fortune just from the power of passively compounding an initial, relatively modest sum?

It turns out that there is a famous example of someone trying to do exactly that: Benjamin Franklin. In his will, he created two separate funds of £1,000 each for the cities of Boston and Philadelphia. The plan was that these funds would be used to make a series of 10 year loans to craftsmen in each of the two cities at interest rates of 5% each. After 100 years of this loan scheme, 10/13 of each city’s fund would be paid out to the city, to use for some civic improvement. The remaining 3/13 would be used to run the same loan scheme for yet another 100 years. After that, all of the remaining balances would be split between the respective cities and their states.

What happened next has many lessons for anyone interested in savings, investment, and creating a legacy with their estates.

The Hope: Compounding While Doing Good

The story of Franklin’s will is told in two excellent books: Benjamin Franklin’s Last Bet by Michael Meyer and Benjamin Franklin’s Legacy of Virtue: The Franklin Trusts of Boston and Philadelphia by Bruce Yenawine. As these authors explain, Franklin calculated how much would be dispersed to each city at the 100 and 200 year marks if all went according to plan. How much should it have been? Converting from pounds to dollars, at the time, the initial £1,000 in each fund was the equivalent of $4,444.44. After 100 years at 5% interest compounded, this would be $584,449!¹

According to the provisions of the will, from that sum, $446,145 would go to the corresponding city, and the remaining $138,305 would continue compounding. After another 100 years, that would reach an astounding $18,187,259.

Besides the impact of these eventual payouts, Franklin hoped that his plan would also yield benefits to the two cities along the way. Rather than investing in what would yield the highest returns, Franklin’s plan provided loans to artisans in the two cities. His hope was that these would enable young craftsmen to get their start, as he himself had benefited through a loan early in his career as a printer.

The Reality: Falling Short

Franklin requested that the plan should be overseen by various civic leaders in the two cities. His will expresses an earnest wish that his plan would be carried out faithfully, but the text also acknowledges that 200 years is a long time and that it might be difficult to maintain his plan so far in the future.

Sadly, it did not take very long for the administrators of the plans to abandon Franklin’s vision of small loans to craftsmen. As Yenawine and Meyer describe, within a few decades, the number of loans being made fell to pitiful numbers. Boston’s fund made 89 loans in the first 10 years after the program started, but by the 1840s, the rate had dropped off to fewer than 1 loan per year on average. In Philadelphia, no loans were made from 1861 to 1874!

What happened? The managers of the funds began shifting away from the loan program to making other forms of investments. In Philadlephia, these alternative investments were mostly forms of municipal bonds. In Boston, the managers invested with the Massachusetts Hospital Life Insurance Company, which was a formidable early kind of investment company.

The managers argued that various restrictions Franklin imposed on who could receive the loans made it difficult to find applicants. Franklin required the recipients to be craftsmen who were married and under 25. The managers pointed out that industrialization was changing the nature of work and demographic shifts meant men were marrying later. Yenawine and Meyer are skeptical of this explanation, arguing that various biases and oversights led the managers to not try very hard to advertise the program and increase the number of applicants.

Besides not accumulating money in the intended manner, Philadelphia’s fund also fell far short in how much money was raised. Early on, defaults on loans that were not collected on put Philadelphia in a hole, and it never recovered.

Franklin’s projection was that the funds should have reached $582,164 by the 100 year point, when the first disbursement was scheduled. In reality, at that point, Boston’s fund was worth $431,756.18 and Philadelphia’s was only a shocking $94,400. For Boston, that’s a CAGR of 4.7%, and just 3.1% for Philadelphia.

Neither fund made up lost ground in the second century, and in fact fell further behind. At the bicentennial, Franklin’s original projections would have led to a disbursement of $18,187,259. Instead, Boston’s was $4,646,613 and Philadelphia’s was $2,256,962.

Endless Litigation and Politics

Even though the funds were smaller than Franklin had expected, they were still large enough to attract plenty of lawsuits. These lawsuits would cause the centennial disbursements to be significantly delayed.

In Philadelphia, a lawsuit was brought in 1890 by Franklin’s heirs. They alleged that the terms of the will violated the (infamous) rule against perpetuities. After several rounds of litigation, they ultimately lost.

Meanwhile, in Boston, there was litigation over who exactly had the authority to select what the 100 year disbursement would be used for. At the time of Franklin’s death, Boston was not yet incorporated as a city. Thus, he had named the town selectmen and the leaders of various churches as members of an oversight board. When the city was later incorporated, the membership of this board changed. At the time of the centennial, lawsuits ensued over the composition of the board and its authority. This was eventually resolved, but not without delaying everything for a few years.

We’ll get to how the funds in each city were spent in a moment, but while we’re on the subject of lawsuits, it’s worth pointing out that a series of legal disputes dogged both funds in the second hundred year period and bicentennial disbursement as well. Besides the expected feuding over how to spend the money, the terms of the loan making scheme also became increasingly out of date. The restrictions to young married men working as artisans sounds incredibly antiquated when we think of these two cities in the 1900s. Lawsuits ensued to try to loosen these restrictions and permit the managers to take a wider view, while still trying to achieve some of the spirit of Franklin’s original plan.

Boston ended up creating a loan program for medical residents. If you squint hard enough, given the importance of medicine in Boston and the overall economy, medical residents don’t seem that far off from the kind of upwardly mobile artisans and craftspeople that Franklin was targeting. Meanwhile, Philadelphia made mortgage loans to lower income people buying houses in the city. Since Franklin’s idea was that skilled artisans were a kind of “backbone” of civic society, providing loans to help people settle down in the city core and own their own houses fulfills a similar purpose. That said, Yenawine and Meyer argue that the cities really could have probably tried harder to still make useful loans to all sorts of small businesses that can be reasonably thought of as “trade” or “craft”.

Given that the courts are often a slow and expensive way to make such changes, anyone trying to carry out a vision like Franklin’s should try hard to make the scheme more dynamic. For example, instead of fixing the interest rates at 5%, which at various times has been uncompetitive, one could instead make the rate depend upon the prevailing market rate (as court decisions ultimately permitted for the Franklin loans). Obviously, it’s hard to predict the future, especially 200 years out, but building in a plan for change could have helped.

How Was the Money Used?

At the centennial, the Boston funds were used to create what is now called the Benjamin Franklin Cummings Institute of Technology. Besides the Franklin funds, Andrew Carnegie also made a matching gift to support this institution. The Franklin Institute was envisioned as a place to teach the sorts of skilled artisans that Franklin’s loan scheme originally targeted. Today, it offers a variety of associate and bachelor’s degrees in subjects like engineering technology, construction management, and automotive technology. It serves a diverse student body, with many students from economically disadvantaged backgrounds: more than 61% of students have a household income of under $30,000 per year. It struggled financially for many years, and was almost subsumed by Boston University in the 1970s. Boston’s bicentennial fund disbursement also went entirely to the Franklin Institute, after much haggling. In 2021, the Cummings Foundation donated $12.5 million to the school, leading to the latest name of the school.

Meanwhile, in Philadelphia, the centennial funds were used to construct a new building for another organization which also happened to be called the Franklin Institute. Despite the similarity of names, there is no connection between the two. The Franklin Institute of Philadelphia was founded in 1824, as initially a kind of reference library and educational society, but it transformed into a science museum. The bicentennial funds were split, with about 75% going to the Franklin Institute and the remainder going to the Philadelphia Foundation to create the Benjamin Franklin Funds. These funds make grants to various charitable causes in the local area.

In the end, these uses seem well within the vision and spirit of Franklin’s original gift. However, there were many, many other proposals that seem remarkably disconnected from Franklin’s goal. For instance, the Philadelphia mayor’s office originally proposed to use the money to fund summer concerts, headlined by Ben Vereen and Aretha Franklin. Others proposed to use the fund to fix potholes in the city’s road – useful, but not exactly a transformative legacy. Although the funds ended up allocated to a useful purpose, it might have been better for Franklin to preclude some of these more ridiculous ideas. It was modest of him to state in the will that he could not predict what would be most useful for the cities at the time, but perhaps it was a little too modest!

Conclusion

On the whole, Franklin’s “last bet”, as Meyer calls it, was quite remarkable. There’s no doubt that the loans and mortgages it made during its accumulation phase were life changing for many recipients. And the final disbursements have been used to educate and inform generations of students and museum visitors. But after reading Yenawine and Meyer’s descriptions, it’s hard not to feel like so much more could have been done.

What happened? Franklin entrusted the administration of his will to leading figures of the two cities, and requested that the administration be free. On the one hand, like the modern day followers of John Bogle, Franklin probably realized how expenses can eat into compounding investments. However, it seems that the people selected to administer the will did not really share Franklin’s vision, and many of them seemed to have little trouble wholesale ignoring his terms, perhaps because they felt they were unreasonable or unworkable. My own takeaway is that he might have done better to directly select a collection of trusted figures he knew personally, at least initially.

Also, the will might have benefited from more flexibility: make the terms of the loan scheme program more general while still articulating a vision for how the investments should work. In other areas, perhaps less flexibility could be called for: even though the funds were ultimately spent toward a good end, setting more guidelines might have more quickly ruled out some wasteful proposals.

All in all, the bet was remarkable in many ways. I would highly recommend both books to anyone interested in history or looking for further lessons that can be applied to their own philanthropy and investing.